Burberry stutters, but fashion brand is on trend

by James Crux, Shares magazine

Shares in British fashion house Burberry have been weak in recent months, a reflection of market concerns about uncertainties facing the luxury sector. Purveyors of high-end fashion items and fragrances are finding it harder to generate the superior growth rates to which investors have grown accustomed, amid a perfect storm in international luxury.

Growth is slowing in China, where the government's clampdown on lavish gift-giving is a significant negative. Protests in Hong Kong, a high-margin regional profits centre for Burberry, have hardly helped, while wider geopolitical tensions everywhere from the Middle East to Russia – and unfavourable currency swings – have been keenly felt too.

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Announcing full-year financial results in May, chief executive Christopher Bailey, successor to revered Burberry boss Angela Ahrendts, who has since moved to Apple, unnerved investors by flagging "increased uncertainty in some markets" at an early stage of the new financial year.

Sales grew by 11 per cent to £2.5 billion in the financial year to 31 March, yet adverse exchange rates constrained adjusted pre-tax profit – up 7 per cent to £456 million – and currency headwinds forced Bailey to lower his 2016 profit guidance too.

Near-term challenges aside, Burberry represents a play on the luxury goods industry's compelling structural drivers; the expansion of emerging market middle-class populations, a rising number of high net worth individuals underpinning trends towards conspicuous consumption and the growing propensity towards international travel, notably by well-heeled Chinese tourists.

The FTSE 100 luxury goods designer and retailer stands as an exemplar of a high-quality company. It boasts brand strength, pricing power (recent price cuts in Asia notwithstanding) and robust cash generation. Burberry is a quintessentially British brand, famed for its iconic equestrian knight logo and Burberry check trademarks, as well as its signature heritage trench coats and cashmere scarves.

Sustained investment over many years to build a highly differentiated brand has created a source of economic returns and barrier to entry rivals will find it tough to encroach on. Investment continues in new stores in flagship global markets and across technology and innovative digital marketing.

Burberry has proved adept at engaging with consumers through social media platforms and fashion events and benefiting from the proliferation of orders taken on iPads in-store and generated over mobile devices.